DEFINED CONTRIBUTION PLANS INCREASE RETIREMENT AGE

September 13, 2004

Over the past 20 years, employers have moving away from defined benefit (DB) retirement plans toward defined contribution (DC) retirement plans. According to a new paper from the National Bureau of Economic Research, this shift affects retirement age and wealth.

The authors use data from the Health and Retirement Study, a survey of over 7,600 households with a member born between 1931 and 1941. They found that:

Workers with DB plans retire two years earlier on average than workers with DC plans.

Their simulations suggest that the continuing shift in pension structure will increase the median retirement age by about 10 months.

These changes arise because of major differences in accrual of pension wealth. Pension wealth in DC plans accrues smoothly, while gains to pension wealth in traditional DB plans spike sharply at older ages, then turn negative afterward, creating a financial incentive to retire at that point.

The authors also find that that the two plans yield about an equal amount of wealth. This is true across different education levels, occupations, and earnings. Another interesting point is that industry, unionization, job tenure and firm size do not significantly influence retirement, although they are related to pension type.

Source: Les Picker, "Retirement and the Evolution of Pension Structure," NBER Digest, May 2004; based upon: Leora Friedberg and Anthony Webb, "Retirement and the Evolution of Pension Structure," National Bureau of Economic Research, Working Paper No. 9999, September 2003.